Saturday, July 26, 2008

After a two-year hiatus, Social Security has made its way back onto the political stage. Both presidential candidates, recognizing that the program is insolvent over the long-run, are claiming that they will confront the system's $4 trillion long-term shortfall. Senator Barack Obama has made a specific proposal to finance part of the shortfall through a tax on people making over $250,000 a year, while Senator McCain has pledged that he'll "fight to save the future of Social Security" and "won't leave office without doing everything [he] can to fix [it]." Although neither candidate has made this a central campaign issue, they should be lauded for their willingness to address it. Yet if history is any guide – especially recent history – they will face considerable obstacles in enacting real reform.

Goldwein's article has an insightful view the Bush administration's handling of Social Security reform, and lessons for whoever becomes President in 2009. Click here to read the whole story.

5 comments:

A good article but containing one key error, one that promulgates the single biggest misunderstanding about Social Security:

"Similarly, the 1983 reforms arrived just four months before the Social Security trust fund would have been depleted (which would have stopped benefit checks from going out on time)"

If my understanding is correct this simply is not true or at least didn't have to be true. In 1983 income excluding interest trailed total cost by $14.9 billion and we would have seen a similar ratio in 1984 if reform had been a failure. The remaining income would have been sufficient to pay about 91% of the schedule. It is hard to imagine any government would simply stop writing checks entirely rather than take the sensible approach of writing a 91% check while promising to try to make up the difference later on if they can reach some compromise.

This is important because too many people have been led to believe that Trust Fund Depletion means that 'Social Security will not be there for me' as in 'no check' at all. We don't need to refight the equation wars over real benefits after depletion, but as long as there is a payroll tax Social Security benefits will continue in at one level or another.

Actually Marc's comment as you quote it is correct: if there isn't enough in the trust fund to pay full checks, my understanding (through past meetings with the SSA's general counsel) is that checks could not be paid on time. The Commissioner doesn't have authority to pay lower amounts, but also doesn't have authority to write checks that don't have funds to back them up. The result is that monthly checks would go out once enough taxes had been collected to pay them in full. (Roughly, you'd get around 11 checks per year instead of 12.)

Now, whether it HAD to be true is another story -- Congress could have appropriated general revenues, just as it could do so in the future. But the basic story, and how it helped push both sides to cut a deal, is pretty much correct.

But I still expect there could have been workarounds that kept most checks flowing. In any event by your formulation the delay should be about 9% per month or about three days with first month checks delayed by that amount and second month checks delayed by six days. It wouldn't take too many months of these rolling delays before the political heat forced some compromise.

So while I'll accept that Marc's formulation is technically correct it would be easy for any reader to translate 'stopped benefit checks' as 'no check at all' as opposed to 'check three days late'. Certainly the careless language deployed by too many of 'bankrupt' and 'flat broke' builds in the 'no check' conclusion after Depletion.

I'm a regular reader of your blog (and now your posts on AB), so I am glad you enjoyed my article. I understand your frustration about those who imply that trust fund depletion implies no benefits, or that an underfunded system will not be there for the next generation.

However, I think I was pretty clear that this is not what happens. That's why I went beyond simply saying the trust fund would be depleted to explain that this would mean benefit checks would not go out on time .

The story of why trust fund depletion was an action-forcing mechanism is a little more complicated than could be described in an op-ed. In fact, the trust fund crisis was in some ways manufactured. The Congress had been allowing Social Security to borrow from other trust funds to avoid depletion, and (because of demands from Rep. Conable) this interfund borrowing would no longer be allowed on July 3, 1983. So not only did the crisis have no real economic or fiscal implications, but it wasn't even based upon the system's lifetime costs exceeding lifetime revenue. But despite being self-imposed and easily reversible, this crisis still forced politicians to act in a way which they otherwise wouldn't have in order to restore solvency -- and only a few months before it would have hit.

1977 was a different story. In that case, the trust fund was still a few years from depletion. But the combination of a poorly-conceived indexing formula, a very large benefit increase, system maturity, and extreme stagflation created a real crisis --- where benefits would grow at unsustainable rates which couldn't possibly be financed with any reasonable amount of taxes. This also served as an action forcing mechanism.

My basic point was that these reform attempts required some type of "crisis" in order to motivate politicians to make tough choices.

Unfortunately, I'm not sure if there is a real crisis date moving forward. The trust fund crisis occurs in 2041, but that would be far too long to wait --- and the cliff effects on taxes or benefits would certainly be harmful. I'm not sure 2017 means much either. In a world of unified budgets and large structural deficits, is there really much of a difference between a few billion dollar surplus in the SS system and a few billion dollar deficit?

If reform does stem from a crisis, I think it will have to be of a different sort than what we've seen in the past. But I guess time will tell.

About me

I am a Resident Scholar at the American Enterprise Institute in Washington, where my work focuses on Social Security policy. Previously I held several positions within the Social Security Administration, including Deputy Commissioner for Policy and principal Deputy Commissioner. Prior to that I was a Social Security Analyst at the Cato Institute. In 2005 I worked on Social Security reform at the White House National Economic Council, and in 2001 I was on the staff of the President's Commission to Strengthen Social Security. My Bachelor's degree is from the Queen's University of Belfast, Northern Ireland. I have Master's degrees from Cambridge University and the University of London and a Ph.D. from the London School of Economics and Political Science. I can be contacted at andrew.biggs @ aei.org.